Sterling was broadly steady versus the euro this week, in part because the financial markets are awaiting more guidance about what happens next in Brexit.
Adding to the euro weakness, it’s worth noting that the Eurozone’s economy continued to weaken, according to trusted statistics this week, with business activity slowing, especially in powerhouse Germany.
The Eurozone’s composite PMI, which measures business activity in the bloc’s key services and manufacturing industries, hit 50.2 this month, said economics watchdog IHS Markit this week. This is only marginally beyond September’s 50.1 and barely beyond the 50.0 figure that separates economic growth from contraction.
According to IHS Markit, it “signals the second smallest expansion of output across manufacturing and services since the current upturn began in July 2013”.
Overall, it’s forecast that that the euro area expanded by just +0.1% in Q3, between July and September, below the previous quarter’s +0.2% growth. With activity lacklustre in October, this trend could continue into the end of this year, which could negatively impact the value of the euro.
In particular, the Eurozone’s economy has weakened, because its largest member and traditional engine room, Germany, is in the middle of a marked downturn.
Germany’s companies shed more jobs than they created for the first time in six years in October, while new orders fell for the 14th consecutive month.
This suggests that Germany’s manufacturing downturn, triggered in part by the US China trade war, might be spreading to other parts of the economy. Germany could soon enter a technical recession, defined as two consecutive quarters of falling output.
What with the Eurozone economy stagnating, it’s little surprise that the European Central Bank (ECB) voted to keep interest rates at all-time lows of 0.0% this week, while continuing its Quantitative Easing (QE) of €30 billion a month.
That said, what with former IMF (International Monetary Fund) chief Christine Lagarde set to take over from Italian Mario Draghi, the ECB could soon ease monetary policy further.
This is because Ms. Lagarde is well-respected for her relationship-building and communication skills. She may convince both the Eurozone’s frugal Northern members, such as Germany and the Netherlands, plus its more fiscally-expansive South, such as Italy and France, toward a common policy. We’ll see, when Ms. Lagarde makes her debut soon, and her influence on the common currency.
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